Oil drops on de-escalation hopes but supply risks remain

Oil prices plunged by more than 11% on Tuesday, a day after US President Donald Trump predicted a quick end to the war with Iran that has disrupted global crude flows. The prolonged conflict, however, is already driving up fuel and energy costs and threatening higher food prices.

Brent futures fell $11.16, or 11%, to settle at $87.80 a barrel. US West Texas ‌Intermediate (WTI) crude settled at $83.45 a barrel, down $11.32, or 11.9%. Both benchmarks logged the biggest single-day percentage loss since March 2022, after rocketing to four-year highs a day earlier due to supply cuts from Saudi Arabia and other producers.

Prices then retreated Tuesday after Trump ​and Russian President Vladimir Putin had a call and shared proposals aimed at a quick settlement to the war, according to a Kremlin aide.

In addition, Trump said on Monday in a CBS News interview that he thought the war against Iran was "very complete" and Washington was "very far ahead" of his initial four- to five-week estimated time frame.

Even ​if the war ends, oil supplies will not immediately rebound, said Simon Flowers, chairman and chief analyst at Wood Mackenzie.

"When the conflict ends, cranking up the supply chain won't be swift," Flowers said. "Product barrels in storage at refineries or in port ‌might be ⁠moved on vessels quite quickly. But if wells are shut-in for a prolonged period, restarting production to full output could take weeks or even longer."

"The longer this lasts, the more significant the shock would be," said Gregory Daco, chief economist at consulting firm EY-Parthenon.

The prolonged conflict is already affecting across multiple sectors, driving up fuel costs, heating and electricity prices, and threatening higher food prices.

Gasoline, diesel, and jet fuel prices rise directly with crude oil. Diesel prices in the US reached $4.65 a gallon on Monday, a 23% jump since the conflict began. Higher diesel costs could increase shipping expenses, slow freight and raise surcharges passed to consumer.

Heating and cooking with natural gas are also becoming more expensive, as Europe's benchmark natural gas rose 75% since the war began. Rising energy costs could affect products made from natural gas, including plastics, rubber, and nitrogen fertilizer. 

Food prices may rise if high oil prices persist. David Ortega, a professor of food economics at Michigan State University, said that sustained high oil prices could gradually increase grocery costs. Fuel cost increases affect farm equipment and fertilizer. Fresh, perishable items could see price hikes faster than packaged foods.

China is deeply concerned over the continued tensions in the Middle East and regards energy security as of vital importance to the world economy, Guo Jiakun, the spokesperson for the Chinese Foreign Ministry, said on Tuesday. 

He stressed that parties need to stop the military operations at once, avoid further escalation, and prevent the regional turmoil from having a greater impact on global economic growth.

Guo also noted that all parties have the responsibility to ensure stable and unimpeded energy supply and China will do what is necessary to protect its energy security.

(With input from agencies)